Equity Monthly View for September 2023

The S&P BSE Sensex rose by 1.5% in the month of October. S&P BSE Midcap Index & S&P BSE Small cap Index increased by 3.6% and 1.2% respectively. If we were to look at 3Y numbers small cap category has outperformed the large cap index by 16% cagr over the last 3 years. Continued flows in the small and midcap category and relatively broad-based growth post covid has led to such stark outperformance.

For the month gone by, India was one of the best performing markets globally; with majority of the global indices witnessing a decline. As a result, valuation gap between India and the most EM markets has further increased. In terms of global developments ECB hiked rates by 25bps; Fed maintained status quo during the recently held policy meet despite hawkish commentary. Thus, the probability of global interest rates remaining high in the near future is quite high. As we have reiterated in the past, in such environment, where the markets are adequately pricing in risks, “Value” as a style does well compared to “Growth”.

Quantum Long Term Equity Value Fund (QLTEVF) saw an increase of 2.5% in its NAV in the month of September 2023; Tier-I benchmark S&P BSE 500 and Tier-II Benchmark S&P BSE 200 increased by 2.1% and 2.2% respectively. Our portfolio stocks within Utilities, Consumer Discretionary and Materials did well; being underweight Energy and relatively expensive consumption sectors helped in outperformance. Some of the portfolio stocks within utilities are seeing good traction, driven by higher than anticipated energy demand. Recently added cement stock did well following price hikes across key markets and continued demand traction. Most of the 2W names that we own within auto pack also did well on the back of decent volume numbers. Sectors such as Financials, Healthcare and IT were key drags in our portfolio. Bulk of the financials drag is attributed to large relative outperformance of public sector banks which we did not own for governance reasons. We don’t see any positive incremental change from corporate governance standpoint in these names and hence will continue to avoid them in the future as well, despite cheap valuations. Within IT, subdued global demand outlook continue to weigh in on the sector. We find valuation within the IT pack attractive and expect demand to recover as technology spends cannot be indefinitely deferred; hence are staying put with our allocations. In terms of portfolio actions, we trimmed our positions in a pharma and auto name which have significantly moved up over the past one year.

Banks in a Good Credit Cycle

If we were to look at any lender with relatively large wholesale book; barring FY23 the growth in corporate book was largely muted over the past several years. The growth in FY23 was a result of certain one-offs such as increased NBFC lending driven by bond substitution due to steep interest rate hikes and inflation led working capital financing. Some of these demand drivers are moderating in the current year. We keep hearing about the narrative around private capex; but in our conversation in most lenders, they are not seeing an immediate uptick in private capex. The reason often cited are; benchmarking against last corporate cycle is wrong as credit to corporate pick up witnessed post GFC was not sustainable (driven by poor underwriting) and will not happen in the current cycle. Some of the segments which account for significant chucks within current capex are into newer areas such as renewables, new energy etc, where banks are circumspect in lending given questions on project viability.

Despite these realistic constrains, we are optimistic on the gradual pick up in private capex activity. On the demand side, we believe improving Real Estate cycle clearly helps as it is big driver of economy. (Real Estate + construction) is ~7% of GDP and should drive demand in other depended industries be it cement, metals etc. So, continued traction here should help capex pickup.

The recent RBI data on private capex sanctions by financial institution (including Banks) is at 11 year high. Bulk of the inflow is into sector such as infrastructure /constructions. Going by this data, FY24 is expected to be fairly strong in terms of private capex. Post covid, government thrust on infrastructure spending will at some point, led to better private capex.

Source: RBI

From a banking perspective, Private & Public bank are well capitalised and good shape to lend to corporates post the clean up over several years. If we were to look at lendable corporates bulk of them are flush with cash post covid, thus the initial leg of capex will be funded through internal accruals and credit demand should pick up over a period. For Banks, so far majority of growth is driven by retail segment; thus, any meaningful pickup in corporate book should drive better growth for the sector. Given reasonable valuation and some of these medium-term drivers we are overweight on Banks.

Near term risks in our view are overall inflation trajectory, global slowdown, and political uncertainty as the country heads into elections next year. To conclude, our portfolio is well positioned to benefit from cyclical economic upcycle over the medium term with major overweight being Financials and Autos. While there could be uncertainty emerging globally or in India; investors should not be unnerved by the near-term volatility and focus on allocating prudently to equities based on their financial goals. Any sharp correction due to near-term headwinds can offer additional valuation comfort and should be used to allocate more to equities with a long-term perspective.

Data source: Bloomberg

Name of the Scheme	This product is suitable for investors who are seeking*	Riskometer of scheme	Riskometer of Tier I Benchmark	Riskometer of Tier II scheme
Quantum Long Term Equity Value Fund An Open Ended Equity Scheme following a Value Investment Strategy. Primary Benchmark: S&P BSE 500 TRI	• Long term capital appreciation • Invests primarily in equity and equity related securities of companies in S&P BSE 200 index	Investors understand that their principal will be at Very High Risk

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Above article is authored by Quantum.

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